Newsletter
FSC TO AMEND RULES FOR FHC REINVESTMENTS
The Financial Supervisory Commission (FSC) recently approved the following principles to govern the forthcoming amendments to its rules over reinvestments by financial holding compa-nies:
I. Reinvestment thresholds
To maintain the momentum for restructuring and consolidation in the financial services market, the minimum investment threshold for a rein-vestment application by a financial holding company (FHC) will remain at the current level of 5% of the invested company's paid-in capital. However, the following accompanying measures will be introduced:
In the future, when an FHC files a reinvest-ment application, it should append both a plan for increasing its shareholding to 25% (in-cluding a funding plan), and a consolidation plan.
Until such time as an FHC acquires at least 25% of another company's shares, or acquires a majority of the directorships in the company, internal personnel of the FHC may not con-currently hold office as directors or supervi-sors of the invested company. The FSC will state the above restriction as an attached con-dition in its reinvestment approval letter.
The fiduciary duty of a director or supervisor appointed by an FHC is toward the invested company in which he or she is serving. Di-rectors and supervisors who breach their fi-duciary duty will bear legal liability accord-ingly.
II. Automatic approvals
The adoption of the automatic approvals system has been advantageous in terms of applying dif-ferent rules to different situations; however, be-cause reinvestment plans involve major strategic decisions that require careful consideration, and to allay public concerns that automatic approval creates a risk of inadequate review, the FSC will restore the 15-day review period as provided under Article 36 of the Financial Holding Company Act (FHCA).
III. Regulation of equity-linked derivatives transactions
The FSC will take into account if an FHC or its subsidiary, or a director, supervisor, or major shareholder of the FHC or its subsidiary, or an-other related party or affiliated enterprise thereof, enters into a derivative contract or trade in a de-rivative product with any person or entity, and, the underlying securities in the transaction in-clude shares in the company in which the FHC intends to invest.
The FSC is also considering amending its "Rules Governing the Types of and Limits on Rein-vestments in Securities by Commercial Banks," to provide that if a bank acquires a financial product linked to the shares of a company in which it also holds a direct shareholding, its combined direct and indirect holdings may not exceed 5% of the invested company's total shares. Prior to the introduction of the above amendment, a bank's risk exposure from its holdings of de-rivative products linked to a particular share must be managed in combination with its risk exposure from its holdings of the share itself.
IV. Amendments in line with Article 16 of the FHCA and Article 25 of the Banking Act
To prevent an entity or its related parties from using ingenious transactions or other equity contracts to evade regulatory review, the FSC intends to amend the various possible ways in which an entity and its related parties might at-tempt to independently or jointly acquire hold-ings, and will amend the rules (a) to require prior regulatory approval for acquisitions that would cause a single shareholder's shareholding in an FHC or bank to exceed 10%, 25%, 50%, or 75%, (b) to define the scope of reporting required for acquisitions by a single entity or related party, and (c) to provide that no shareholder rights will attach to shareholdings acquired without ap-proval, and that the regulatory authority may order such holdings to be disposed of within a notified period.
Under the proposed amendment, the regulations for the acquisition activities regarding financial institutions will become more restrictive in the future.